A 'Stimulus Package'?
Opinion Editorial by Thomas Sowell -
Jan 30, 2008
20 ratings from readers
Congress is gearing up to create a "stimulus" package to help soften a downturn in the American economy. Is this even an area, though, where government intervention is likely to help?
Both political parties seem
determined that the federal government should create a “stimulus package” of
things designed to cushion a downturn in the economy.
That alone should be enough to
make us remember that “the devil is always in the details,” because things that
are bipartisan are often twice as bad as things that are partisan.
A bipartisan intervention is
virtually guaranteed to be a grab bag of inconsistent policies thrown together
in order to get the votes of people with contradictory ideas of what ought to
be done.
The idea of a stimulus package
is based on the general notion that there are things the government could do to
make things better in the economy.
Unfortunately, there is a vast
difference between what the government could do and what it is likely to do.
Economists can give you all
sorts of scenarios in which government intervention could make things better,
whether when fighting off a recession, regulating domestic markets or
controlling international trade.
Some people even believe that
whenever there is “market failure,” the government ought to step in.
Of course markets can fail.
Everything human can fail. But if Alex Rodriguez strikes out, do the Yankees
take him out of the game and send in a pinch hitter for him?
No one would dream of
suggesting such a thing. We are far more rational when discussing sports than
when discussing politics.
The fact that the market is not
doing what we wish it would do is no reason to automatically assume that the
government would do better.
There are too many examples of
government interventions that made things worse, the Great Depression of the
1930s being the most tragic.
Those on the left love to
believe that the stock market crash of 1929 showed the failure of the free
market and that the New Deal interventions in the 1930s saved the day.
But the stock market crash of
1987 was just as big and Ronald Reagan resisted loud calls for him to
intervene. The result was not another Great Depression but the beginning of a
decades-long period of prosperity.
Before Presidents Herbert
Hoover and Franklin D. Roosevelt came along, there was no expectation that the
federal government would intervene when the stock market crashed or when there
was a downturn in the economy.
Previous stock market crashes
and previous downturns in the economy worked themselves out faster and less
painfully than the Great Depression of the 1930s, just as the 1987 crisis did.
The track record of government
intervention is far less impressive than its rhetoric.
One of the biggest problems
with government intervention in the economy is that politicians usually have
neither the knowledge nor the incentives to intervene at the right time.
Bruce Bartlett has pointed out
that most government intervention in an economic downturn comes too late. That
is, the problem it is trying to solve has already worked itself out and the
government intervention can create new problems.
More fundamentally, markets
readjust themselves for a reason. That reason is that people pay a price for
their misjudgments and mistakes.
Government interventions are
usually based on trying to stop them from having to pay that price.
People who went way out on a
limb to buy a house that they could not afford are now being pictured as
victims of a heartless market or deceptive lenders.
Just a few years ago, people
who went out on that limb made money big-time in a skyrocketing housing market.
But now that they have been caught in the ups and downs that markets have gone
through for centuries, the government is supposed to bail them out.
Solving short-run problems, especially
in an election year, often means creating long-run problems. Pumping money into
the economy can help many problems. but do not be surprised if it also leads to
inflationary pressures and financial repercussions around the world.
Thomas Sowell is a Senior Fellow at The Hoover Institution at Stanford University in California. He has published dozens of books on economics, education, race, and other topics. His most recent book is his memoir A Man of Letters.
